Local Property Taxes Declining After Period of Relative Stability

First in series of Rockefeller Institute reports looks at fragility of local revenue source critical to funding schools, public safety and other front-line services 

Albany, N.Y. — Local governments and school districts across the country are facing a serious fiscal crunch accelerated by weakness in property tax collections. Local property taxes dipped in the first quarter of 2012, following two quarters of growth in nominal terms. But this marked the sixth consecutive quarterly decline when collections are adjusted for inflation, according to a new report from the Rockefeller Institute of Government.

The property tax is, by far, the most significant revenue source used to finance critical local services such as K-12 education, police and fire protection, and other front-line public services. Local property taxes remained relatively strong during and immediately after the Great Recession. But tax collections have softened, due in part to the lagged impact of falling housing prices on property assessments and tax collections. Legislated limits on property taxes also play a role.

Local property tax revenues declined by 0.9 percent in nominal terms in the first quarter of 2012, after two consecutive quarters of growth. However, after adjusting for inflation, local property taxes actually declined by 2.8 percent in the first quarter of 2012, marking the sixth consecutive quarterly decline in real collections, according to the report.

Prolonged weakness in the property tax, combined with soaring employee benefit costs, continued budget stress at the state level and the prospect of deep spending cuts in Washington, raise the prospect of serious budget problems and service cutbacks in local governments in many parts of the country, writes report author Lucy Dadayan, a senior policy analyst at the Institute. The report also documents that the severity of the weakness in the property tax varies among states and is particularly acute in those states that have experienced the largest declines in housing prices.

"This weakness in property tax revenue comes at a tough time for local governments," Dadayan writes. "Budget pressures are coming at local governments from every angle and affect both the revenue and spending side of municipal and school budgets."

The Institute looks at local tax collections, including the property tax, in its ongoing quarterly State Revenue Reports. This report focusing on the property tax alone is the first in a new series. Subsequent reports will examine how underlying economic forces and institutional structures are affecting property tax collections.

For a full copy of the report, visit www.rockinst.org.